Chinese private capital flows are dominated by foreign direct investment and banking-related
flows, with portfolio flows remaining relatively small (as a share of GDP).
Of these components, banking-related flows account for the majority of the
cyclical variation in total flows and seem to be driven by expected changes
in the exchange rate. Both the composition of capital flows and the factors
that drive their variation are likely to change as the Chinese authorities
gradually open the capital account in line with their stated intention. Given
the size of China's economy, the implications of a continued opening of
its capital account and a significant increase in capital flows are potentially
very large. They include a greater influence of global financial conditions
on China (and vice versa), a change in the composition of China's net foreign
assets, and a change in the nature of the economic and financial risks facing
China.